Despite easing of lockdown support still necessary

The UK has been able to begin to take full advantage of the success of its vaccination programme by announcing a staged lifting of lockdown measures culminating, it is planned, for restrictions to be fully lifted by the late June.

As Boris Johnson commented when questioned by journalists at last evening’s press briefing, there will always be those who want him to act with more haste just there will be those who advise greater caution, but he believes that this plan can be seen as irreversible yet able to be delayed if circumstances demand.

The crux of the lifting lies with the gap between the four stages of the plan which means that data will be used to determine that it is safe to move on.

With shops being able to reopen on April 12th, the second quarter will see the recovery begin in earnest with schools reopening and certain social distancing rules relaxed next month.

Rishi Sunak who will deliver his budget to Parliament next week is expected to extend both the furlough scheme and the repayment period for the repayment of emergency loans.

Both measures have been demanded by businesses that were concerned that the lifting of restrictions would lead to the end of the furlough scheme. That would have brought extra pressure on SMEs in particular which have seen their balance sheets decimated by the Pandemic.

It is expected that the furlough scheme will run until the end of June to coincide with the ending of restrictions.

Later this morning, the scale of the need for support to remain in place will be brought into greater focus as employment data for the UK is released.

It is forecast that the claimant count will have risen from 5k in December to 35k in January. This will lead to an increase in the unemployment rate to 5.1%.

The most pessimistic analysts believe that the rate will peak at or just above 8% later in the year. This backs the view of the independent members of the MPC that negative interest rates may still be necessary to add stimulus.

There is a fear that as lockdown restrictions are lifted, there will be a significant rise in job losses as perhaps thousands of businesses find that their position has become untenable and are unable to continue. This will be particularly true in hospitality where the restrictions will not be fully lifted until mid-May.

The pound reacted positively to the news from the Government, making a new high of 1.4086 versus the dollar, closing at 1.4060.

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2022 before pre-Pandemic levels seen

The U.S. economy is going to face several contrasting views of its strength both factual and anecdotal over the next couple of quarters.

While it is generally accepted that the economy is on the right track, it is in the area of employment that most concerns are being voiced. One such concern was voiced by FOMC member and Dallas Fed President Robert Kaplan yesterday who believes that the unemployment rate will remain stubbornly high, only falling to pre-Pandemic levels in 2022.

He went on to say that levels of Government debt can be financed comfortably as long as the dollar remains the world’s reserve currency.

With the current situation in the Eurozone hardly encouraging and the Yuan now at least decades away from being in a position to challenge, despite China closing in on the U.S. as the world’s largest economy, the position of the greenback remains unchallenged.

Concerns over the rate of inflation, perhaps not currently but in the medium-term refuse to go away. It is expected that Fed Chairman Jerome Powell will be forced to comment to calm fears.

Powell makes his semi-annual pilgrimage to Washington this week to testify before each chamber separately.

There is a fine line to be drawn between supporting the economy and allowing it to overheat. Powell has been something of a darling of the markets with his willingness to provide advance guidance.

However, investors are also concerned that he is no Greenspan or Bernanke, and he may not have the experience to be able to deal with such a vital question.

Despite his concerns over the unemployment rate, Kaplan went on to say that his own team’s expectations of 5% growth in the economy this year may be a little pessimistic.

That explains quite eloquently the dilemma facing analysts and investors. One FOMC member voicing two opposing views.

The dollar continues to plumb the depths of its recent range. Yesterday it traded between 90.57 and 89.99. It closed at 90.08. A significantly weaker dollar will bring a further concern over inflation and that will simply add another concern for the FOMC at its next meeting.

Growth via exports seen as the remedy

One of the most significant drags on the Eurozone economy over and above the Pandemic has been the strength of the euro.

It looks on the surface that the Fed stole a march on the ECB by adding not only such a high degree of monetary support to the economy, but it did so with a degree of haste unheard of in Brussels or Frankfurt.

The supposed fragility of the Eurozone both politically and economically will always draw concerns over whether other nations will follow the UK through the exit.

The words of Margaret Thatcher more than thirty years ago about the lunacy of joint monetary policy without a similar fiscal arrangement continue to ring true.

Cyprus, Greece, Italy, and Spain have each been through the rumour mill about leaving the euro whether forcibly or voluntarily.

One country that is rarely, if ever, mentioned is Germany.

Yet again it will be German industrial, manufacturing and engineering skills that will enable it to pull away from the current recession reasonably quickly.

This means that Bundesbank will be concerned about growing inflation as the ECB is forced to retain its current level of support or even perhaps add to it.

The battle ground could be the euro as the ECB is determined to undermine it to improve competitiveness while those concerned about inflation see it as a pressure valve.

The answer to that issue remains with the Fed which, as mentioned above, is benefitting from a weaker currency but raising concerns about inflation.

It could easily turn out that it is Germany that finds itself out of step. Should that happen, the departure of Angela Merkel, a fierce European, could easily begin questioning voices regarding the benefit of supporting Germany’s European neighbours and whether it is a price worth paying.

The euro rose against yesterday close to the top of its recent range. It reached 1.2165, closing at 1.2151.